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Financial Structure is the specific mixture of long-term debt and equity that a company uses to finance its operations. This financial structure is a mixture that directly affects the risk and value of the business. The main concern for the financial manager of the company is deciding how much money should be borrowed and the best mixture of debt and equity to obtain. The financial manager also has to find the least expensive sources of funds for the company to use. It is also referred to as capital structure. Capital structure as the name implies is one of the most puzzling issues in corporate finance literature. Capital structure basically can be referred to as a firm's financial framework. It is also seen a mixture of a variety of long term sources of funds and equity shares including reserves and surpluses of an enterprise The capital structure of a firm is very important since it related to the ability of the firm to meet the needs of its stakeholders.
The capital structure of a firm explains the ways in which a firm finances its investment and overall operations. It consists mainly of a combination of debt and equity as well as all other sources of finance such as retained earnings etc available to the firm Therefore, proportion of debt to equity is a strategic choice of corporate managers. Financial distress, liquidation and bankruptcy are the ultimate consequences that lie ahead if any major misjudgment occurred following any financing decision of the firm's activity. Thus, firms with high leverage need to allocate an efficient mixture of capital that will finally reduce its cost. Capital structure constitutes a substantial part of an organization and therefore is significant in a company's financial operations. More so, financing decisions of firms are very crucial for the financial wellbeing of the firm. Researchers have continued to analyze capital structures and try to determine whether optimal capital structures exist. An optimal capital structure is usually defined as one that will minimize a firm's cost of capital, while maximizing shareholder's wealth. The debate of optimal capital structure has been the focal point of the finance literature for previous several decades.
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Explain briefly the traditional view of the relationship between the capital structure and the value of the firm?
The traditional view of a firms capital structure is the process of increasing goodwill value of the firm, while limiting the use of capital expenses and controlling capital costs. The first achieves this through materializing its limited finances through financial leverage.
How does Xerox follow Potter's diamond theory?
Potters model highlights 4 determinants of national advantage; factor conditions, demand conditions, related and support industries, firm strategy, structure and rivalry. Xerox has distilled these components in their business plan; value proposition, market segment, value chain structure, revenue generation and margins, position in value network and competitive strategy.
What are personal determinants?
There are many determinants of personality. These determinants are largely dependent on the environment that a child grows up in.
What are the determinants of capital formation?
Economic Factors like income, population, monetary sytem, price/planning system etc; Non economic determinants such as social structure, political stability, governance etc. - Dr V B Hans Mangalore (INDIA)
What are the Factors affecting beta of a portifolio?
Factors that affect the beta of a portfolio are the kind of business the firm is in, and the extent of operating leverage the firm has. A third factor is the extent of the firm's financial clout.
What are the key determinants of a financial structure?
financial ratios
What effect does leasing have on a firm's capital structure?
Leasing is a substitute for debt financing, so leasing increases a firm's financial leverage.
What should be the relation between the target capital structure for a firm and the firm optimum capital structure?
The target capital structure represents the ideal mix of debt and equity that a firm aims to achieve to optimize its cost of capital and risk profile. The optimal capital structure, on the other hand, is the specific combination of debt and equity that minimizes the firm's overall cost of capital while maximizing its value. Ideally, the target capital structure should align closely with the optimal capital structure, as maintaining this alignment helps the firm achieve financial stability and growth. Deviations from the optimal structure may lead to increased costs or financial distress, thus underscoring the importance of managing the target structure effectively.
What is the primary determinants of a firm's value?
- shareholder's wealth - growth - dividend-payout ratio - leverage -
Does a firm use financial leverage if preferred stock is present in the capital structure?
Yes, a firm can be considered to use financial leverage if preferred stock is present in its capital structure. Preferred stock typically has fixed dividend obligations, similar to interest payments on debt, which can amplify the returns to common equity holders when the firm performs well. However, it also introduces risk, as the firm must meet these obligations before any dividends can be paid to common shareholders. Therefore, the presence of preferred stock contributes to the overall financial leverage of the firm.
What does financial flexibility mean?
Financial flexibility refers to a firm's ability to take advantage of unforseen opportunities or their ability to deal w/ unexpected events depending on the firm's financial policies and financial structure. For example, a firm w/ high debt obligations and weak solvency (abilty to pay obligationas as they come due) and liquidity (abilty to turn assets into cash quickly) is not very financially flexible.
Does the firm use financial leverage if preferred stock is present in its capital structure?
Yes, a firm can be considered to use financial leverage if preferred stock is part of its capital structure. Preferred stock is a form of equity that typically has fixed dividend payments, similar to debt obligations. While it does not create a legal obligation like debt does, the presence of preferred stock can still increase the firm's financial risk and amplify returns on common equity, characteristic of financial leverage. Therefore, the inclusion of preferred stock indicates some level of financial leverage.
What is absolute segs?
Absolute SEGS, or Absolute Segregated Accounts, refer to a financial structure used primarily in investment management where client assets are kept in separate accounts that are fully segregated from the firm's assets. This ensures that clients' funds are protected and not subject to claims from the firm's creditors. This structure provides a higher level of security and transparency for investors, as it minimizes the risk of loss due to the firm’s financial issues.
What are major determinants of organisational behavior?
Some major determinants of organizational behavior include leadership style, organizational culture, communication practices, group dynamics, and the organizational structure. These elements can influence employee attitudes, motivation, job satisfaction, and overall performance within an organization.
What is a financial marketing solutions firm?
A firm that provides financial marketing solutions for the financial services and alternative asset management industries. One example of this kind of firm is Ovis Creative.
What is the biggest financial asset management firm in Omaha, NE?
Wise Financial soluton is the biggest financial assest management firm in Omaha.
You are a hard-working analyst in the office of financial operations for a manufacturing firm that produces a single product If you have developed the following cost-structure information for this com?
You are a hard-working analyst in the office of financial operations for a manufacturing firm that produces a single product. You have developed the following cost-structure information for this company. All of it pertains to an output level of 10 million units. (1) Using this information , find the break-even point in units of output for the firm. ------------------------------------------------- Return on operating assets = 30% Operating asset turnover = 6 times Operating assets = $20 million Degree of opearting = 4.5 times -------------------------------------------------- (2) Define the term financial leverage. Does the firm use financial leverage if preference shares are present in the capital structure. (3) Define the term operating leverage. What type of effect occurs when the firm uses opearting leverage ?
